Ezra Holdings Limited - Paying for the Past or Positioning for the Future?

Ezra-Chiyoda-PercentageChiyoda JV Moving Forward: 
As mentioned in our last credit update on Ezra1 , the issuer intends to sell 50% of its subsea division, EMAS AMC, to Chiyoda Corp (“Chiyoda”, 6366 JP), for a total consideration of USD180mn. Since then, on 29/09/15, both parties have signed a binding share sale and subscription agreement (subject to closing conditions). As a result, Ezra has deconsolidated EMAS AMC’s results from the group, which has radically changed preliminary FY2015 results (ending August 2015) relative to audited FY2014 results.

Ezra 2.0:
Given that EMAS AMC contributed more than 60% of prior annual revenues, Ezra’s top line would shrink sharply going forward. In fact, the subsea division generated USD976.4mn in revenue for FY2015 (the segment declined 2.2% y/y). The segments that were still consolidated into Ezra’s results, the OSV business (EMAS Offshore, “EMAS SP”) and shipyard / marine services business (Triyards, “ETL SP”), generated USD249.7mn and USD282.9mn in revenue respectively. The divestment of EMAS AMC will constitute as a major transaction (according to the Listing Manual) and would require a shareholder vote via an EGM (timing yet to be disclosed). The deal with Chiyoda would terminate on 31/03/16 if it is not executed by then, though Ezra’s management hopes to close the deal by the end of 2015.

Recent Performance:
For FY2015 (ending August), continuing operations saw revenue increase 11.0% y/y, driven by gains in the shipyard business, which helped to offset weakness in the OSV business. These trends persisted during the most recent quarter (4QFY2015 revenue up 22.0% y/y to SGD147.4mn) with the shipyard segment contributing USD35.3mn increase in segment revenue y/y while the OSV segment drove declines of USD14.9mn. The shipyard business benefitted from the contract for four liftboats won during FY2015 and executed through 4QFY2015. Ezra’s order book remains healthy at USD2.0bn.

Earnings Pressure:
Despite the gains in revenue, Ezra however faced gross margin compression, falling from 14.8% (4QFY2014) to 10.9% (4QFY2015). The shipyard business (using Triyard’s numbers) saw gross margin compress from 27.1% to 21.7%, driven by the shift in product mix, while the OSV business (using EMAS Offshore’s numbers) actually saw a gross loss during the quarter due to lower utilization of the fleet as well as pressure on lease rates. Pre-tax profit was supported by USD29.3mn gain from the disposal of fixed assets during the quarter, which resulted in a pre-tax profit of USD25.0mn for continuing operations (compared to a pre-tax loss of USD5.7mn during 4QFY2014). Adjusting for the disposal gains, pre-tax losses for continuing operations would have been comparable. After factoring contributions from discontinued operations (EMAS AMC generated a net loss of USD16.7mn during the quarter), the group generated USD1.4mn in profits after tax for the quarter.

Technical Analysis
Daily Chart
Rights Issue Strengthened Liquidity:
The SGD202.2mn rights issue executed late July has helped shore up Ezra’s liquidity profile. The group (including EMAS AMC) generated USD38.0mn in operating cash flow for the quarter, but spent USD84.1mn in capex. This resulted in negative free cash flow of USD46.1mn. Originally, management intended for the group to achieve positive free cash flow by 4QFY2015, but missed this target in part due to ~USD30mn in capex for the Lewek Constellation spilling into 4QFY2015. Though the firm also generated cash from asset sales (USD25.8mn), there remains a gap of ~USD58mn. To fund this, along with prepare for some looming maturities in September, Ezra did both the rights issue, as well as increased bank borrowings by USD110mn during the quarter. This allowed Ezra to end the quarter with USD417.8mn in cash. Due to weaker EBITDA though, our calculation of EBITDA / interest coverage (which does not include Other Income as well as Associate / JV contributions) has weakened distinctly from 2.8x (end-FY2014) to 1.5x (end-FY2015). However, utilizing the EBITDA calculation as required by the interest coverage covenant, interest coverage actually improved from 4.4x (end-FY2014) to 4.6x (end-FY2015). (Read Report)

Source : OCBC Asia Credit Research

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